For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.

I’m not a millennial, but a number of my Vanguard colleagues currently fit this demographic. And they often seek counsel from the one with a few flecks of grey in her hair―about work, life, and investing.

When it comes to investing, my message really comes down to “Get your investment priorities straight.” In short, here’s what matters:

Invest 12‒15% of your income for retirement.

Create an emergency reserve.

Balance investing and debt reduction.

Let me elaborate.

Max your retirement savings, and consider using a Roth

If you work for an employer who offers a tax-qualified retirement plan, contribute at least up to the company match. If your employer doesn’t offer a match, then consider the investment options and costs within your plan. You may have more investment flexibility and control by investing in an IRA.

A Roth IRA account can be a millennial’s best financial friend, giving new meaning to BFF. At this stage of your career, your income is likely much lower than it will be later in life, so the relatively small tax deduction you would get from a traditional deductible 401(k)/IRA today is likely to be far outweighed by the benefits of the tax-free withdrawals from a Roth account in the future.

Use a 12‒15% savings rate as your target. Does this number make you cringe? Keep in mind this goal includes both your contributions and your company match. If you’re not there, start small and increase your savings rate 1% every year. For example, if you’re 25 and save 5% in your 401(k) with a 3% match, you’re already at an 8% contribution rate. Set up an auto-increase deferral rate of 1% and by age 30, you’ll be well on your way at a 13% savings rate. And this way, you probably won’t even feel the increase pinch along the way.

The good news is that more millennials are opening IRAs, and at a faster rate than their older counterparts. According to our research, they represent 19% of new accounts today versus 7% in 2006.

Earmark part of your savings for emergency reserves

An emergency reserve is a must. This typically means keeping at least 3‒6 months of living expenses in cash reserves, such as a money market fund. Another alternative is to consider your Roth IRA, which allows you to tap your contributions (but not necessarily any earnings) tax- and penalty-free. While I don’t necessarily advocate this for everyone, realize that a Roth IRA offers flexibility and, while the account should be prioritized for retirement, the options it provides make it an especially attractive vehicle for most young investors. While you build up your cash emergency reserve, you might think of your Roth IRA contributions as a supplement―a backstop against a really big emergency that you’ll hopefully never experience.

Balance investing and paying down debt, focusing first on non-tax-deductible debt

If left unchecked, consumer debt, such as credit card debt, can be a recipe for financial disaster. It usually comes with high interest rates and, in most cases, there are no tax advantages. That said, some debt can be considered a good thing because it provides proof that you’re a good credit risk when you’re looking later to finance big ticket items like your first home. The key is to manage the debt so that you don’t accrue large balances and become strapped with the tyranny of compounded interest.

For millennials, the elephant in the room is mostly likely student loans. You may choose to focus on one goal at a time or “hedge your bets” by balancing savings and debt reduction. See this article for more information. I’m fortunate that I learned the keys to financial independence at an early age from my parents and my mentors. Even though I didn’t make much money at the outset of my career, I participated in my 401(k) and invested in an IRA whenever I could afford to. I jumped at the chance to take advantage of a Roth IRA when it was introduced in 1998. At that time, I converted my small traditional IRA to a Roth IRA. And I still contribute to my Roth IRA.

I share my financial life lessons with my millennial friends every chance I get. Some of them listen to me. And sometimes I hear them sharing their own financial decisions with each other and witness firsthand the confidence this gives them. In fact, many of them now tell me how they’re educating their own millennial friends (and in some cases, their own parents!).

Special thanks to my fellow Gen X colleague, Stephen Weber, for his contributions to this blog.

All investing is subject to risk, including the possible loss of the money you invest.

Maria Bruno

Maria is a senior retirement strategist in Vanguard Investment Strategy Group. She leads a global team that's responsible for conducting research and providing thought leadership on the topics of retirement, wealth, portfolio construction, and financial planning for individual investors. Maria specializes in retirement planning, retirement income solutions, and wealth management strategies. Prior to her current role, Maria worked in our financial planning and advice departments. Maria earned a bachelor of science in business administration (B.S.B.A.) from Villanova University and is a Certified Financial Planner™ professional.

Comments

Donald G. | April 20, 2017 4:21 pm

Well folkes there are two distinct investor types that will not use Vanguard services. tThe ultra wealthy have their own stable of personal investors to advise them as to how and invest their billions.It must be nice to have shown no “earned income” over 10 to 12 generations.At the other end of the spectrum are the poor who have to knock their financial brains out just to feed,clothe and house their family.They can never learn the ‘savings mantra” because it is every thing they can do to financially survive.For some it is a lack of education,for others it is a general lack of financial knowledge. I know that a poor person can take charge of there financial lives but it takes a lot of determination and drive to do it.But these taxpayers are the very ones that Vanguard needs to reach in my view.Very few investors can see the long term benefits of starting out saving $10/mon. and increasing the amount every time you get a raise or pay off a bill.A previous blogger pointed out that it is the compounding of your money that really starts to steam roll once you have reinvested that dollar and it earns a return times 35-40 years.I have read about investors who have shared in these blogs and have started with nothing and have built their programs into an amount that will make them financially comfortable for the rest of their lives.Vanguard will make me into a millionaire because I am a committed long term investor.Any one can do this but you have to commit for the long term!

Paul G. | May 14, 2015 8:02 am

Bravo for bringing up current and later tax rates with regard to IRAs. Too often, the advice is to sock away the maximum in an IRA, without regard to the taxation of withdrawals as ordinary income. The benefit calculation is a lot more complex, taking into account favorable capital gains and dividend tax rates on unsheltered income.

Donald G. | May 12, 2015 10:47 pm

As a 67 year old Federal government retiree I would like to relate what I think is one way for all younger folkes to fund their retirement.#1-Start the first day of your job. Go to personnel and get you a form w-4.Read your personnel booklet that covers your company’s retirement percentages.Learn the benefits offered by your employer. At our company you could contribute up to 15% of your gross pay.We got a generous matching feature up to 10% but no matching from11 to 15%.Roths weren”t even offered during a good part of my work history but I wanted tax shelter during my heavy earning years so my 401k did the job for me.I claimed an additional personal exemption for every 5% I could save.By doing so my boss(Uncle Sam) took out very light during the year and all I did was put this money into MY 401k. I always felt that my boss was underwriting my contributions to retirement,paying me matching money on these same contributions and I was keeping the tax man at bay for better than 35 years of employment.Then all you have to do after you retire is call up Vanguard and say gee I have a large six figure 401k that I want to move via a trustee to trustee transfer could you help me. I can assure you that they will do everything within their power to make sure that your IRA is invested just like you want it.In 8 years when I turn 70/12 I am going to call them up again(rebalancing yearly of course)and say gee could you start sending me my RMDs to my Money Market account. I love Vanguard

Robert R. | May 12, 2015 10:06 pm

I would like this to add. In certain individuals cases, it’s best to go for a traditional IRA and 401K. I will use my personal situation as an example. I’m single and plan on being for the remainder of my life. I’m also a philanthropist. If I max out my traditional 401K and IRAs each year, that is a federal income tax savings of $5,875.00 if I should remains in the 25% bracket for the remainder of my working years. So I take that savings of $5,875.00 and invest it into a brokerage account using the same index funds that my 401Ks and IRAs are allocated in. In 40 years, I save 235,000 in taxes I would have paid if I would have gone for a Roth 401K and Roth IRA.

So when I retire at age 60, I can withdraw from the account, and donate all of the money to charity. This will prevent any taxes from being taken from the pre-tax earning retirement accounts. I’d rather have the money go towards purposeful causes, than Uncle Sam get it to blow on redistribution of wealth agendas and a bloated federal government.

Richard G. | September 14, 2015 10:40 pm

To Robert R. May 12. 2015 10:06 p.m.I think I followed just about everything you said about maxing out your 401k and personal IRA until your 60 and start your retirement. You said that you would rather give it to charity which I think is great. However you are leaving out a very important part. You are going to have to pay the tax on all of that untaxed 401k and IRA money before you can give it away ,buy a car with it or whatever. You did not say why you chose 60 as the time to retire but you do know that you do not have to touch 401k or IRA money until 701/2. You could let it grow for another 10 plus years and have that much more to give to your charities. Good Luck with your Program.

Adam M. | July 13, 2015 11:08 am

I believe that the guideline is referring to gross income. Since $1 in a Roth is more valuable than $1 in a traditional IRA, I like to pretend that my Roth contributions are 30% (25% Fed, 5% state) higher than they actually are when trying to come up with a percentage that I’m contributing to retirement.

Dan O. | April 3, 2015 1:54 pm

Dan S. | April 2, 2015 5:54 pm

Say you are a millennial and are not investing, nor do you have an emergency fund of 3-6 months. What do you do? Focus on getting the emergency fund fully funded first and then start investing? Build both at the same time?

Paul D. | April 6, 2015 12:31 pm

I think that’s a fair question Dan. It’s one that many of us “pre-Boomers” get asked by our grandkids. I am no financial advisor, but I’d say do your best at building both.

My reasoning is that time is the key factor with investments, the longer you wait to get started, no mater how small you start, the longer to reach a successful goal. Maybe take a balanced approach and put a little (whatever you can afford) into each every month.

Eventually, the discipline to save and invest becomes more comfortable, like a favorite old pair of shoes.
Good Luck and Good Fortune.

Richard M. | April 15, 2015 9:02 am

I highly recommend Dave Ramsey’s Book “The Total Money Makeover.” He also has a class called “Financial Peace University” which I have coordinated for my church. His concept is getting out of debt and staying out of debt using the 7 – Baby Steps:
1. $1000 in an emergency fund
2. Pay off debt smallest to largest (Debt Snow Ball)
3. Build 3-6 month emergency fund
4. 15% toward retirement in 401K, Roth IRA, IRA etc..
5. Save for kids college
6. Pay off your mortgage
7. Build wealth and give generously
His book gives the details on how to implement, but the key is living on a WRITTEN BUDGET every month telling your money where to go!

Dave Ramsey is a great starting point (but a little light on the investing side of it) though I think he’s too conservative in general. I’d say Mr. Money Mustache hits a little harder than Dave, but both can get you started in the right direction.

This is coming from a debt free (minus the mortgage), positive net worth over 6 figure millennial!

Smiley E. | April 2, 2015 12:11 pm

All great points of advice. I wonder why Vanguard has not published statistics on what an average 401K or IRA is worth in their holdings. Fidelity just did that and that was a large awakening to folks that have not jumped on the savings band wagon.

Lastly and a +60 year old I have had to counsel younger folks that its OK to have a tax deductible 401K as well a non deductible IRA and in my case since I have a self employed side job a SEP IRA all at the same time.

The Roth thing does not work for us because we are over that $ threshold limit of combined incomes.

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For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.